From ICMS-E to ecological IBS: environmental fiscal transfers and green governance in Brazil

Abstract

The article analyzes the incorporation of environmental criteria into the fiscal transfer established by the Tax Reform approved in Brazil in 2024. The country, organized in a tripartite federation (Union, states, and municipalities), had until then a model in which the states collected the Tax on Circulation of Goods and Provision of Services (ICMS) and passed on part of the revenue to the municipalities. The states had the authority to establish their criteria for these transfers, which could include environmental considerations—known as Ecological ICMS. The Ecological ICMS, created in Paraná in 1991, played a crucial role in financing environmental actions by rewarding municipalities that implemented ecological conservation measures, such as the creation of Protected Areas and the protection of water sources. This model allowed states autonomy in defining transfer percentages and criteria, resulting in a diversity of approaches reflecting regional socio-environmental realities. However, in 2024, only 20 of the 27 states adhered to the policy, limiting its impact at the national level.The 2024 reform simplified the tax system, replacing the ICMS with the Goods and Services Tax (IBS), a value-added tax managed by a central committee. In the new model, 5% of the states IBS will be transferred to municipalities based on environmental criteria, ensuring the continuity of financial incentives aimed at sustainability. However, the percentage is now fixed and mandatory for all states, which can still define the distribution criteria for municipalities. The new tax transfer obligation has institutionalized the need for public environmental governance and coordinated activities among environmental agencies of different spheres. This provides new opportunities to strengthen environmental governance, requiring greater integration between the municipalities, states, and the federal government. Through the centralized coordination of the Ecological IBS, it will be possible to establish minimum national parameters that ensure equity in the distribution of resources and promote the adoption of environmental practices in line with the international sustainability commitments made by Brazil, such as the Sustainable Development Goals (SDGs). The transition from the Ecological ICMS to the Ecological IBS opens up new possibilities for environmental financing in Brazil but requires attention to regional specificities and institutional strengthening so that progress can be translated into concrete benefits for society and the environment. Based on literature review of environmental governance and coordination, along with alegal analysis, we will identify the states that currently implement fiscal transfers based on environmental criteria. We will examine what these criteria are and the governance structure surrounding them. Additionally, we will outline the new rules of the ecologicalIBS that have been established, along with its proposed operational framework. The goal is to discuss how the transition from the ICMS-E to the ecological IBS will impact environmental policies in Brazil.